Angel investors vs venture capitalists

Angel investors vs venture capitalists

If you’ve ever read anything about startup businesses that have hit the big time, you may have seen angel investors and venture capitalists (VCs) mentioned. Here’s a quick guide to what they are and how they differ from each other.

What's the difference?

At a simple level, angel investors invest their own money while venture capitalists invest other people’s money. They’re both sources of equity funding in that they invest in return for a share in the business.

What is an angel investor?

What are they?They’re people who invest their own money in exchange for a share of your business, but often also provide mentorship and advice. While some invest on their own, there are also groups – flocks – of angel investors who get together to invest in businesses.

Who are they?
They don’t have to be rich philanthropists with deep pockets – although that’s a bonus. They can be successful business people, who’ve been where you are, and can see the opportunities within your business. They might be experts in your industry or just people passionate about what you’re trying to achieve.

When do you want them to appear?
Angel investors usually come into your business at an early stage to help it get off the ground or take the next step after you’ve launched.

Where do you find them?Angel investors are often found through good networking. Talk to others in your industry, your accountant, lawyer or business advisor, business development groups – even your customers. That guy who bought new bulldozer tracks from you yesterday might be the one with the golden pockets.

Why do they get involved?They’re not doing this for love alone – they’re investing to make a return. They might be patient and willing to invest long-term but many of them like to cash out after a few years and that may involve selling the business. Be sure this is the type of funding you want before you find yourself saying goodbye to a chunk of your dream.

What is a venture capitalist?

What are they?
They’re professional investors using other people’s money (and maybe some of their own) to take a share in your business. They generally take a much bigger share than an angel investor. They’re looking for well managed businesses with a competitive advantage that look like they could quickly grow enormously. As a result, it’s not easy to get them onboard.

Who are they?They’re hard-core investors so be sure you’re ready for what they expect from you and where they want to take your business. Do your homework on them before approaching to make sure your business fits with their interests and when and how they like to invest. Your business is probably just one of many they’re investing in.

When do you want them to appear?Venture capitalists (VCs) tend to come in at a slightly later stage than angel investors – once your business is ready to scale up and really take off.

Where do you find them?Venture capitalists might find you if your business has been successful – and especially if you have an innovative product that promises to be a real money generator. While you can find them listed online, the best option is to get an introduction through an angel investor, business advisor, lawyer, accountant, or other industry source.

Why do they get involved?VCs want to be actively involved in the business. They may join the board and will want some say in the direction you’re taking. Ideally, they want to see your business become a public company. They’re all about making a substantial return on their investment. They’re putting other people’s money into it, after all. And they could be investing millions of dollars.

How to get angels and VCs onboard

Read our chapter on pitching for business funding to get an idea of the information you’ll need to share with an angel investor or venture capitalist.

Section 6.2, How crowdfunding works

Crowdfunding can get you the money to build a business and the attention to build a customer base. We’ll take you through the basics of how crowdfunding works.